BP is in
talks with
Sinopec of
China on a
wide-ranging
joint venture
that could put
Britain's
biggest
company at the
centre of the
world's
fastest-developing
energy market.

Lord
Browne, the BP
chief
executive, is
hoping to pull
off the kind
of coup he
achieved in
Russia when he
stole a march
on ExxonMobil
and other
rivals by
tying up a
ground-breaking
deal with
local group,
TNK.

The
London-based
oil group is
refusing to
comment
publicly on
the talks, but
a spokesman
admitted "you
don't have to
be a rocket
scientist" to
realise China
is a vital
market.
Well-placed
sources
confirmed Lord
Browne had put
forward
various
proposals to
China's
biggest
producer of
refined oil
products and
state
officials
about a
tie-up.

Critical to
any future
deal is the
attitude of
the Beijing
government,
which still
controls 80%
of Sinopec
through its
parent group,
China
Petroleum and
Chemical
Corporation.
The remaining
20% is listed
in New York,
Shanghai and
Hong Kong. BP
took a 2%
stake at
Sinopec's
partial
privatisation
in 2000 but
sold out last
year to take
profits.

BP, awash
with cash from
high oil
prices, has
been active in
China for 30
years and has
been slowly
forming joint
ventures on
specific
projects. It
already has a
joint venture
with Sinopec
to build
acetic acid
plants in
Chongqing and
Nanjing as
well as a
petrochemical
operation in
Shanghai. The
British group
also runs a
network of 500
petrol
stations
jointly with
Sinopec in the
eastern
province of
Zhejiang.

ExxonMobil,
Shell and
other oil
majors have
all
established
footholds in
China but Lord
Browne has
been anxious
to win
first-mover
advantage with
a decisive
move,
preferably
through a
major equity
stake.

It will not
be easy. The
Reuters news
agency
reported that
an early BP
proposal to
take a "very
substantial
stake" by
swapping oil
and gas fields
for a Sinopec
holding had
already been
knocked back.
But China is
desperate to
win access to
more oil
reserves,
greater
refining
expertise and
petrol
retailing and
logistics
skills, while
BP wants new
customers.
China is not
just the
world's most
populous
nation, it is
also going
through a
transport
revolution
that is
promising to
turn a country
of cyclists
into one of
gas-guzzling
motorists. Car
sales were up
around 55% in
2002 and 80%
in 2003,
although they
dipped to 10%
in 2004 as the
government
cracked down
on credit
facilities for
car buyers.

Still every
expectation is
that car sales
will grow by
10% - 20% a
year for the
foreseeable
future,
triggering a
rush by major
western car
manufacturers
to set up
plants there.
With 5m cars
sold last
year, China is
the third
largest car
market behind
the US and
Japan but is
expected to
become the
biggest after
2010.

The tarmac
road network
is already
being
massively
expanded. It
has been
increased by
50% since 1990
to 34,000
kilometres but
the government
wants to
double this
number again
by 2020.

The growth
in car-buying
reflects the
increasing
affluence of
the country
and has been
helped by the
emergence of
consumer
credit,
better-paid
private sector
jobs and the
appearance of
cheaper
foreign
models. Around
60% of the
country's 1.3
billion people
live in rural
areas on $1 a
day but a
growing middle
class is
emerging in
the cities
where nearly
all car
ownership is
concentrated.

A cap on
petrol prices
in China
keeping them
below
international
levels has
helped the
roads become
increasingly
clogged but
has led to
plunging
refining
margins over
the last 12
months for
Sinopec. The
company is
struggling to
build new
refineries
with its more
limited
cashflow,
leaving China
with a
potential
political
problem of how
to fuel the
next stage of
industrialisation.

Lord Browne
has shown
himself to be
a deft
political
animal,
continually
avoiding the
kind of
environmental
and other
criticisms
that rival
Exxon has
faced. He has
close
relations with
Tony Blair and
has managed to
avoid tangling
with more
prickly
foreign
characters
such as the
Russian
president
Vladimir Putin.
Energy
analysts
suggest that
if anyone is
going to
sweet-talk
Chinese
president Hu
Jintao, it is
more likely to
be the low-key
Lord Browne
than the more
brusque Texan,
Lee Raymond of
Exxon.

Jason
Kenney, top
oil analyst at
ING Barings,
believed a
potential
tie-up between
the two sides
made sense. "I
can only see
this as a big
positive for
BP if for no
other reason
than allowing
it to keep a
close eye on
the key
developing
demand centre
on the
planet," he
said. But
Citigroup
analysts
considered a
huge deal too
risky. "We
doubt that BP
would be
willing to
enter a joint
venture on the
scale of TNK-BP,"
it argued in a
note.

Lord Browne
has a clear
template to
work from
should he
eventually win
an equity
stake in
Sinopec, as he
did with TNK.
His drive into
Russia through
the purchase
of 50% of TNK
in 2003 was
seen as daring
and possibly
dangerous, but
is paying off
handsomely.
ExxonMobil
tried to
follow suit by
negotiating to
acquire a
sizeable chunk
of another
major Russian
player, Lukoil,
only to find
the Kremlin
firmly
stepping in
and slamming
the door
closed on the
Americans.

Since then
the position
for foreign
oil majors
trying to win
a greater
holding of
Russian
businesses has
only become
worse.
Vladimir Putin
is talking
about
tightening up
the rules
governing
foreign
participation
in oil and gas
licensing
while
encouraging
state-owned
Gazprom to
move into oil
by buying
Roman
Abramovich's
Sibneft group.

TNK-BP is
now a main
driver of BP
production
growth when
others such as
Shell are
struggling to
halt falling
output. The
City deemed
the £8bn
takeover of
TNK expensive
at the time
but that was
when global
crude prices
were rattling
along at $25
per barrel.
Yesterday they
were at $64,
with gas
values
following in
their wake,
transforming
the economics
of Russian
hydrocarbon
production and
encouraging a
rash of new
gas fields to
be looked at.

Taking an
equity stake
in Sinopec
with its $35bn
market
capitalisation
and profits of
$7.2bn a year
would hold few
regulatory
problems. But
it would touch
on sensitive
political
nerves in a
nationalist
country still
under
communist rule
despite its
liberal
economic
approach.

But BP is
now breathing
down the neck
of Exxon,
vying for the
title of the
world's
biggest oil
and gas
producer. A
bold move into
China could
deliver up all
the consumers
it needs in
what promises
to be the
ultimate
motoring
market.

Other
ventures

While some
question
whether BP is
wise to head
into a highly
politicised
Chinese
market, no one
will ask
whether the
company has
the financial
clout to make
things happen,
as it
demonstrated
yesterday.

A series of
announcements
underlined the
scale and
breadth of the
oil company's
investment
programme and
its
willingness to
spend some of
its growing
mountain of
cash that
could reach
$40bn (£23bn)
by the end of
this year.

BP signed a
letter of
intent with
India's
state-run
Hindustan
Petroleum to
form a joint
venture
covering
refining and
marketing in
India. A $3bn
refinery is to
be built in
Bhatinda,
northern
Punjab, while
a network of
petrol
stations is
planned.

Separately
it is planning
to invest
$2.2bn to
double
production at
its Wamsutter
gas field in
the Rocky
Mountains of
the United
States.

BP has just
announced
plans to sell
off its
chemicals
division for
$9.5bn and is
expected to
record annual
profits for
2005 of up to
$24bn.